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1.7 million Brits face surprise pension tax bill

With just days to go until the new pension freedoms become reality, new research from YouGov and wealth manager Old Mutual Wealth reveals that one in every ten people (9%) who will have access to their entire pension savings from next week don’t know that pension income is taxable.

There are 18.5 million people aged 55 and over in the UK, meaning 1.7 million people could potentially face a surprise tax bill as they have more flexible access to their savings.

In addition, a significant one in four people (24%) don’t fully understand the tax treatment of pension income – that normally, 25% can be taken tax free with the remaining amount taxed at their marginal tax rate.

The survey also unveils that only one in four (26%) people who could have immediate access to their pension savings have a good understanding of income drawdown. This means that almost 13.5m people do not understand the main method of withdrawing cash without buying an annuity. However, this is an improvement from the 17%* of people who said they had a good understanding of pension drawdown when asked in July 2014, showing that awareness is improving as the freedoms become a reality.

Similarly, just 38% of people suggested they had a good level of understanding of annuities themselves, up from 30% previously*, while high understanding of pensions as a whole reduced from 47%* to 45%.

A significant proportion of people are planning to make use of the new pension freedoms post April. The research shows that over half (56%) are planning to access their pension savings in some format, including:

14% of these will take their 25% tax free cash and leave the rest invested

11% will take different amounts as and when they like

10% say they will take regular drawdown payments

8% will take some of the money from their fund, leaving the rest invested

6% want to take their whole pension as cash despite tax implications

7% say they will take their pot of less than £30k under trivial commutation rules

Only 14% of people plan to still purchase some form of annuity.

Adrian Walker, Retirement Planning Manager at Old Mutual Wealth, says: “It is absolutely vital that people understand the tax implications of taking income from their pension savings. The new flexibilities that come into effect next week are great but poor planning could lead to surprise tax bills.

“Having greater control over how and when you take income from your pension savings is a positive change, but there could be disastrous outcomes if people don’t take advice and understand their options better. The Government’s Pension Wise service will be an important tool in improving understanding of the choices people have of drawing income from their pension savings. However, only by seeking full professional advice will people be able to receive personalised recommendations tailored to their individual circumstances.”

Old Mutual Wealth is part of Old Mutual plc a FTSE 100 group that provides life assurance, asset management, banking and general insurance. Old Mutual is trusted by more than 19.4 million customers across the world and has a total of £342.7 billion assets under management (as at 30 June 2016).

*Old Mutual Wealth announced the sale of Old Mutual Wealth Italy to Ergo Italia on 9 August 2016. The transaction is pending completion.

This press release is for journalists only and should not be relied upon by financial advisers or customers. Investments may fall or rise in value and investors may not get back what they put in.